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Certainty of Uncertainty:
Changing Investment Approaches
by Helen Sanders, Editor
Deciding on how to invest a company’s surplus cash would appear to be a nice problem to have. In an environment of constrained liquidity, flat growth in many countries and considerable uncertainty about the future, having surplus cash is an important cushion against market shocks and depressed performance. Indeed, despite the challenging economic environment, treasurers are having to deal with more cash than ever. According to J.P. Morgan Asset Management’s Global Liquidity Survey 2011 (‘Global Liquidity Survey’), 47% of treasurers reported that they had larger cash balances than the previous year, compared with only 27% who were managing less cash.
Finding appropriate repositories for this cash is an essential treasury function, particularly to ensure that principal is protected and cash is available when it is required. Although seeking a return on this cash has been unfashionable since 2008-9 in comparison with security and liquidity, the persistence of low interest rates means that treasurers’ responsibility to protect principal has to involve not only managing the risk of counterparty default, but also preventing erosion of this cash through inflation. Yield, as an investment objective, is coming back. According to the Global Liquidity Survey, while 44% of treasurers were prepared to take additional risk in their investment portfolio in 2010, this figure rose to 61% in 2011. This is not to say that treasurers have cast aside all their mothers’ warnings about keeping their dinner money safe in their pockets so it doesn’t get lost or stolen; indeed, treasurers have become more sophisticated in their risk analysis. As Kathleen Hughes, Head of the Global Liquidity Sales, Goldman Sachs Asset Management (GSAM) describes,
“Treasurers are becoming more focused on counterparty risk, whether investments are held directly or through MMFs, leading to greater sophistication in investment decisions and demands for enhanced transparency.”
However, they are increasingly willing to compromise on liquidity (26%) or duration (34%) risk to enhance their returns.
Investor responses to a low interest rate environment
Ever since interest rates started to tumble, few regulators or commentators have been able to indicate with any degree of certainty how long the low interest rate environment is likely to persist. Treasurers have therefore been faced with a complex dilemma. On one hand, as well as interest rates being low, liquidity has also been constrained, so companies have not been inclined to tie up their cash over a longer period in case it is required for contingency during a market downturn, or for strategic investments such as M&A. Similarly, treasurers have been disinclined to tie up their growing cash war-chests in medium- or longer-term instruments at low rates, as they may miss the opportunity to invest at more favourable rates should conditions improve.